Australia has historically had low electricity prices by world standards. But over the past eight years retail electricity prices have roughly doubled. This rate of increase is unprecedented in the 33 years that the Australian Bureau of Statistics has been keeping records.

Today, Australia’s households are paying electricity prices that are at or near the highest in the world, even at purchasing power parity rates of exchange.

Reliable indices of the prices paid by business users are not available, but our members have reported similar outcomes.

The rise in the retail price comes despite a fall in the wholesale price of electricity. Network costs, and more recently but to a lesser degree, environmental costs, are the culprits.

In networks, the evidence is that government-owned electricity network service providers have grown much larger asset bases and hence charge far more to do the same job, no more reliably, as their privately owned peers.

This is the heart of the electricity price problem. It originates in the arrangements that were created when the industry was “reformed" around 15 years ago.

But the problems were entrenched through regulations created by the Australian Energy Market Commission in 2006 – just before the price explosion started.

A large part of the problem is that the financial return that state governments collect from their electricity networks is proportional to the size of their asset bases. Returns grow as the business grows, and so the incentive is to “gold plate" the assets.

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Electricity price outcomes may have been disastrous for energy users, but state governments that own network businesses, and the managers and workers at these businesses, have done very well.

These observations are not new. Our association made them long before it was popular to do so. Since then a Senate inquiry, the review of the limited merits review, the Productivity Commission and the Grattan Institute have all endorsed our observations. Even the Australian Energy Markets Commission – which answers to state government energy ministers – could not disagree.

Many have since called for privatisation, including the Prime Minister just three months ago. But
Julia Gillard
has now recanted from this. Instead of privatisation, the proposed solutions are now “smart" meters for households, more government funding for the regulator and consumer advocates and centralised network planning standards.

Why the soft-pedalling on an issue that is calling so clearly for decisive action, not yet more half-measures?

Money, as always, is part of the explanation: if the states privatise their electricity network businesses, they lose the profits, the income tax on those profits and the fees that they levy on the debt that their treasuries provide to these businesses. Profits alone are sizeable, but the debt fees and income taxes often more than double the state governments’ receipts.

It can be no surprise, therefore, that state governments, even Liberal state governments, have been so reluctant to grab the privatisation chalice. Why kill the goose that lays the golden egg? Privatisation may be the preferable approach, but it’s not the only solution.

A meaningful start, in the absence of privatisation, would be to reduce regulated prices to take account of the income taxes and debt fees from the network businesses they own. This would reduce the super-profits that the states derive from their electricity networks, and thereby reduce the incentive to gold-plate. It might also encourage the states to think twice about continuing to own these businesses.

These solutions have been put to the Australian Energy Market Commission, to no avail. There seems to be more interest in protecting the states’ income streams than pursuing the long-term interest of consumers.

So, as it stands, if the states choose not to privatise their network businesses, energy users will need to rely on smart meters for households, centralised network planning standards, bigger bureaucracy and more government-funded consumer advocacy to ensure they get a fair deal.

Smart meters are no silver bullet. More than three-quarters of electrical consumption in Australia has been “smartly" metered for several decades. Despite this, there is very little or no time variation in retail prices for the vast bulk of this consumption. What difference is smart metering for the last quarter of consumption possibly going to make in bringing prices down?

And is the government really ready for serious consumer empowerment? Not the “critical friend" type of engagement that is proposed, the serious tough negotiation type?

And is more bureaucracy really going to cut the mustard? Things have become strange when a regulator that did not even ask for more money has another $23 million foisted on it to bring prices down. An irony if ever there was one.

This motley crew of half measures will need to stand against the state governments’ desire to keep prices high in order to maintain the lucrative financial rewards that their network businesses provide. A Morris Minor against a Rolls Royce jet engine, as Sir Humphrey might say.